In this deal analysis, Chris and I talked with new investor Emily about the investment property she and her husband recently purchased in Pueblo. They were sitting on a considerable amount of equity from their Denver home and are making that money work for them by investing in their first rental property.
- Listen to the podcast “#66: Using Denver Equity to Invest in a Pueblo Rental Property” on the Colorado Springs Real Estate Investing Podcast
- Watch the YouTube video (at the bottom.)
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Learn More about this Property
Shortly after recording this Deal Analysis, Leah and I walked the property with Emily and Kyle. Watch the video to see what the house looks like and hear more about how they plan on getting the house rent ready.
Emily and her husband Kyle bought their Denver home about two years ago. Since then, their house appreciated significantly thanks to extensive renovations and the Denver market. They decided to do a cash out refinance and use that money to invest in Pueblo.
Many people complain that it’s impossible to cash flow in the Denver market, but it also gives the gift of appreciation that can be used to invest in other areas.
Investment Property Details
This is a 3 bedroom/1 bathroom single family home in the Bessemer neighborhood of Pueblo. It went under contract twice before they purchased it.
Appealing Features of the Property
The location of the house is 5 minutes from the Riverwalk and I-25, in addition to being near parks, grocery stores, and schools.
Property Contract Details
The house was previously listed at $185K but after falling out of contract twice, the seller dropped the price to $165K. Leah spoke with the listing agent and found out that the seller wanted to offload the property as quickly as possible. After checking with lender Bill Rodriguez that he could facilitate a quick close, she recommend they offer list price and a two week close.
Sometimes, the strongest offer is not the highest one. By finding out what was most important to the seller, Leah was able to effectively help her clients craft a winning offer.
The inspector found that the house was in good condition for being over 100 years old. Easily fixable repairs include: gutters and drain spouts; radon mitigation; and purchasing a washer, dryer, and swamp cooler.
The major issue discovered was that the entire sewer line needed to be replaced. This is likely why the house fell out of contract the second time and caused the $20K price drop. Quotes for the sewer line came in between $8,500-11,000.
Fortunately, the appraisal came in at the same time. Appraisals are typically ordered after inspections, but the quick close necessitated they be done in tandem. This was good news for Emily and Kyle because the house appraised at $185K, giving them $20K in instant equity.
In Colorado Springs and Denver, we usually tell clients to bring appraisal gaps, but in Pueblo, it’s possible to buy a home that has equity. This cushion gave us room for some creative financing to fund the sewer line replacement.
Property Financing Details
We used the Rental Property Spreadsheet to run the numbers on this home.
Emily and Kyle originally offered list price of $165K for the home, which the seller accepted. To fund the sewer replacement, I suggested they finance the repair by increasing the purchase price.
They increased their offer to $173.5K, and that extra $8.5K was paid as a vendor credit at closing directly to the company performing the sewer work. The cost of the repair came out to exactly $8.5K, so they didn’t have to pay anything out of pocket. Their mortgage increased by about $30 a month.
Property Operating Expenses
The yard is xeriscaped, so they will save money on landscaping. Tenants will be responsible for snow removal, in addition to electricity and gas.
First Year Returns
Their annual cashflow is a little over $1500 and the cap rate is 4.7%. These numbers are very similar performance-wise to Colorado Springs, but the key difference is they were all in for about $60K. Many people come to me wanting to invest in the Springs for $50K, and I tell them that’s not feasible anymore.
Pueblo offers investors the chance to get similar returns as the Springs with a lower barrier to entry.
Emily and Kyle plan to hold onto this property for a long time. Eventually, they will likely do a cash out refi on home and use that money to invest in another property.
One of the main concerns I hear from investors who are interested in Pueblo is the risk factor. Higher unemployment rates than Denver and the Springs make them hesitant about investing there. To me, employment rates equate to vacancy factor one way or another.
Typically, we underwrite vacancy at 3% in Denver and the Springs. By bumping up the vacancy rate in Pueblo to 8% we solve that problem of calculating the higher risk. While I don’t expect their vacancy rate to be this high in actuality, it allows them to see one possible scenario.
Connect with Us
If you want to learn more about the Pueblo market or figure out your own investment strategy, reach out to me. I’d be happy to help you find the right market that fits your goals as well as a property to get you started.